VOL. 23, NO. 2
SUMMER 2010
BENEFITS LAW
JOURNAL
From the Editor
Employee Benefits Tea Party
O
ver the past 30 years employee benefits have experienced a tremendous upswing in regulations and a downturn in participation and benefits. This is not a coincidence. Heaping well-intended
rules on top of each other has produced a cacophony of regulatory
nonsense. Even worse, endless regulations have added to employer
costs, uncertainty and risks, draining the resources employers would
otherwise have devoted to benefits. To promote benefits coverage we need a Tea Party–like movement to remove government
regulation.
The rise and fall of defined benefit pension plans shows perfectly the bell curve effect of the government’s regulatory approach.
In the dark days before ERISA, disclosure and fiduciary standards
were virtually nonexistent and there were a handful of mostly taxrelated rules, such as mandatory vesting at age 65 and a modicum
of funding requirements. The result was that many would-be retirees
discovered too late that their employer-provided pension was an
empty promise. (The current $1 trillion shortfall in state and local
retirement and health benefit funding also illustrates why some rules
are needed.)
ERISA imposed some much-needed order and fairness in the
benefits marketplace. After a brief period of upheaval as the various
players sorted things out, we arrived at a “regulatory state of repose”
where pension plans thrived and employees generally received the
benefits promised. By 1980 the “traditional” pension plan was the
retirement program of choice. Summary plan descriptions were short
and practically readable. Although employers did most of the heavy
lifting for their employees, corporate HR and benefit departments
From the Editor
were lightly staffed. The national savings rate was 10 to 12 percent
without any encouragement from the still-to-come 401(k) plan.
Company-sponsored health programs, including a sizable measure of
retiree health, were common place.
But ERISA was not perfect and occasional abuses slipped through
its cracks. Sometimes workers were misled or unfairly denied benefits. Sometimes an employer (the early cases frequently seemed to
involve doctors) found a way to abuse the system to grab an extra
helping of benefits or an oversized tax deduction. Sometimes other
stuff went wrong, like a participant choosing a single life annuity,
leaving his widow pensionless. With each inequity or perceived
abuse Congress stepped in with legislation to “fix the problem.” As
new political leaders came to power and heard a one-off story of a
constituent who was treated unfairly by a plan administrator, they had
to do something too.
Indeed, starting with the Tax Equity and Fiscal Responsibility Act
(TEFRA) in 1982, Congress passed a steady stream of legislation that
the Internal Revenue Service and the Department of Labor turned
into a torrent of new regulations. There were top-heavy, affiliated
service group, employee leasing, and anti-individual retirement
plan rules to keep the doctors and other professionals in check;
excise taxes to punish companies that were able to successfully
manage their pension investments and wanted to remove excess
funding from their plans; even greater excise taxes and penalties to
punish employers that were not able to successfully manage their
pension funding; and Byzantine annuity and distribution rules to
ensure that participants properly considered how to withdraw their
benefits and didn’t wait too long or start too early, to name just a
small selection.
The urge to improve was particularly irresistible when it came to
curtailing benefits for higher-paid employees. The maximum benefit
limits were reduced, allowed to rise for inflation, and then reduced
again; compensation ceilings were imposed; and discrimination tests
were added, strengthened, and then modified. Many of these changes
came with grandfathering and “fresh-start” transition rules that would
cross an actuary’s eyes.
Thirty years of well-intended improvements have made things
worse. Today, pension plans are dinosaurs being replaced by 401(k)
plans and the national savings rate sputters along at a paltry 3.3
percent. Pension plans became personally less important to management and other corporate decision-makers but with reduced upside
for a well-funded or overfunded plan and huge downsides for an
underfunded plan. Compliance is expensive and mistakes are more
frequent. HR and benefits personnel must constantly learn new
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From the Editor
rules—and sometimes forget old ones. Participants are confused and
frequently don’t recognize the value of their benefits. It’s just easier
on management and the bottom line for companies simply to switch
to a 401(k) and let employees do some of the heavy lifting—or to
forget the whole thing and pay higher salaries with no benefits. Along
the way, employer-provided health coverage became an expensive
“right” that was denied to many and retiree health benefits evaporated
even faster than pensions.
A similar regulatory effect has played out in executive compensation, except that in place of a bell curve there is an escalating line. In response to a growing perception that corporate
boards, large shareholders, and the like weren’t doing their jobs
in regulating pay, Congress passed golden parachute excise taxes;
limits on perks and freebies; limits on deductible compensation;
stock option standards; oodles of governance and shareholder
disclosure rules; and the Mother-of-all deferred compensation
laws. But rather than curb the size of executive compensation
packages, every ceiling on pay turned into a minimum standard
and new rules encouraged additional forms of compensation.
Today, 1980s-style executive compensation programs look paltry
in comparison.
The key “marker” of unnecessary regulation is look for areas
where legislative reforms have failed. It’s not because the politicos
didn’t make sufficient changes or take the “right” approach. It’s
that the problem being fixed wasn’t suitable for a legislative solution. The lesson is that any man-made system of regulation will be
imperfect and that we must accept a certain level of unfairness and
system abuse.
The Tea Party solution would require a reexamination of compensation and benefit regulations to determine what’s really needed. Recognize that employees are adults, and business managers
are employees too and that, while most people aren’t stupid,
everyone does stupid things once in a while. And acknowledge
that no one except lawyers and lunatics reads any document longer than a page or anything written in CAPITAL LETTERS. Then
tear up every law and regulation that cannot be shown to be
necessary.
I’ve ignored the health care elephant in the room. Long lag times
between writing and publication makes it impossible to speak of the
obvious ills surrounding overregulation of employee health benefits.
As we go to press, it seems that we’ll have 3,000 pages of new health
laws with tens of thousands of pages of regulations to follow. But
with the publisher beckoning, I am forced to punt on health benefits
until the regulatory flood waters crest.
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From the Editor
Either way, please pass the crumpets . . . and perhaps some
bourbon.
David E. Morse
Editor-in-Chief
K & L Gates, LLP
New York, NY
Reprinted from Benefits Law Journal Summer 2010, Volume 23,
Number 2, pages 1-3, with permission from Aspen Publishers, Inc.,
Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437,
www.aspenpublishers.com
Law & Business
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